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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Conceptual Framework of Corporate Governance

Bharat Cement Ltd plans a new plant. The board consults local villagers, employees, lenders and suppliers, and accepts that long-term value depends on balancing their legitimate claims, even where this reduces short-term payout to shareholders. A director objects that the board's only duty is profit maximisation for shareholders. Which statement is most accurate?

The board follows stakeholder theory, which holds that a company is accountable to all groups affected by or affecting its activities, such as employees, lenders, suppliers and communities, not only shareholders. The director's profit-maximisation view reflects shareholder primacy, which is a different approach and not the one being applied.

  1. AThe objection is correct, since stakeholder claims have no standing in governance theory
  2. BThe board's approach follows stakeholder theory, which holds that the company is accountable to all groups affected by or affecting it, not only shareholdersCorrect
  3. CThe board's approach follows agency theory, which requires equal payout to every stakeholder
  4. DThe board's approach follows stewardship theory, which prohibits consulting outsiders

Explanation

Stakeholder theory extends accountability beyond shareholders to employees, creditors, suppliers and communities. The director's view is the shareholder primacy view, which is a different theory and not the one the board is applying. Agency theory focuses on owner-manager conflict, and stewardship theory does not forbid consultation.

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